Complex product risks

Below is an overall description of the characteristics of certain complex products, their markets, and the risks associated with these products.

Trading financial products always involves risk. As a general rule, you should only trade financial products if you understand both the products and the associated risks.

Foreign exchange trading

When trading foreign exchange (forex), the investor speculates on the price movement of one currency relative to another, where one currency is sold and the other is purchased. For example, an investor may sell British pounds (GBP) against the US dollar (USD) if they expect the USD to increase in value relative to the GBP.

Foreign exchange is traded as a margin product, allowing you to invest more money than is available in your account by borrowing from Saxo. Forex can be traded as FX spot, FX forward, or FX options. FX spot involves the immediate exchange of currencies. FX forward and FX options are settled on a future date at agreed prices. FX forward requires the transaction on the settlement date. FX options give the purchaser the right, but not the obligation, to transact on the expiry date, while the seller has an obligation if requested by the purchaser. Purchased options involve limited risk (a premium), which is payable when the contract is made. Sold options involve unlimited risk due to price changes in the underlying FX Spot pair.

The currency exchange market is the world's largest financial market, operating 24 hours a day on working days. It is characterised by relatively low profit margins compared to other products. High profits are typically achieved through large trading volumes, often via margin trading as described above. In foreign exchange trading, a net gain (after costs like commission and spread) realised by one market player is always offset by another player's loss. Saxo acts as the counterparty for all forex transactions and quotes prices based on market-obtained prices, though this does not mean Saxo’s gain or loss is directly offset, as we hedge risks with other counterparties.

As foreign exchange is margin traded, allowing positions larger than your funds alone would permit, small market movements can significantly impact your investment. This high risk in forex trading can lead to substantial gains or losses, potentially even exceeding your deposit.

Forex products are complex instruments and come with a high risk of losing money rapidly due to leverage. 64% of retail investor accounts lose money when trading forex with this provider. You should consider whether you understand how forex trading works and whether you can afford to take the high risk of losing your money.

CFDs

A CFD, or contract for difference, allows you to speculate on changes in asset values, such as shares. If your speculations are correct, you profit from the value difference (minus costs); if incorrect, you pay the difference (plus costs). The value of a CFD depends on its underlying asset. CFDs are always margin traded (see the previous section for FX margin trading information) and typically involve Saxo as the counterparty, though some are traded on regulated markets. The price always moves with the price of the underlying product, which is in most cases traded on a regulated market. The price and liquidity of CFDs in individual shares mirror the underlying asset’s market. Index CFDs, however, are over-the-counter (OTC) products with a price fixed by Saxo on the basis of the price and liquidity of the underlying shares, the futures market, the estimated future dividends, the effects of interest rates, and so on.

As CFDs are margin traded and therefore allow you to take larger positions than you would otherwise be able to with your funds, small market movements can significantly impact your investment. CFD trading is therefore high risk but potentially high gain, even if the deposit is small. If your total exposure exceeds your deposit, you risk losing more than your deposit.

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 64% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

Futures

Futures trading involves speculating on the future price movement of a specific underlying asset. A future gives the holder a standardised obligation to buy or sell the underlying asset at a specified price on a certain future date. The underlying asset could be, for example, raw materials, agricultural produce, or financial products. Depending on the contract, the asset is settled either by price difference or actual delivery at the settlement date. Futures are always traded on margin (see more about margin in the sections about forex and CFDs above) and in a regulated market, either by direct trading in the stock exchanges’ trading systems or by reporting of transactions for trades executed outside the exchanges’ regular trading systems.

As futures are margin traded and therefore allow you to take larger positions than you otherwise could with your account funds, small market movements can significantly impact your investment. Futures trading involves a high degree of risk, potentially leading to high gains or to losses that exceed your deposit.

Options trading

A contract option grants the right or obligation to buy or sell a specified amount of an underlying asset at a fixed exercise price by or on its expiration date. A call option involves the right to buy or the obligation to sell, while a put option involves the right to sell or the obligation to buy. Contract options that are in-the-money at expiry will always be exercised.

Trading contract options involves high risk. Bought contract options may expire worthless, losing the initial investment (premium and costs), while sold contract options can result in substantial (potentially unlimited) losses. Saxo requires margin charges to cover potential losses on sold options, but losses can exceed the margin charged and you are liable for those losses.

If your total exposure on margin trades exceeds your deposit, you risk losing more than your deposit. If the underlying asset of a contract option is margin traded (i.e., a derivative), exercising the option results in a position in the underlying margin traded product with associated risks and margin liabilities.

By default, you are enabled to buy contract options (puts and calls). To enable writing/selling contract options, you can adjust your settings in the platform.

Options trading is highly speculative and not suitable for all investors due to the risks involved. Buyers and sellers of contract options should familiarise themselves with the types of options (put or call, bought or sold) and their associated risks. Contract options are traded with Saxo as the counterparty.

Stock options

Final settlement of stock options requires physical delivery of the underlying stocks versus payment of the strike value in cash. If you hold a stock options position but lack the required cash or stocks, you will fail to meet the contractual obligation.

Final settlement occurs when the holder of a long option position exercises the right to buy or sell the underlying stocks on or, in the case of American-style options, before expiry. All in-the-money long option positions held by Saxo clients are automatically exercised at expiration. Prior to and on expiration, short option positions are assigned via a random assignment lottery. At expiry, there should be no "assume" procedure for delivering on short option positions. Instead of the assume procedure, the clearing statements from the broker should be used to reflect the true exchange expiry outcome. 

As a general rule, Saxo clients must take responsibility to meet the delivery requirements related to their option positions, especially when approaching expiry. Saxo will not pre-emptively act on client positions to avoid delivery failure.  

If a client fails to meet delivery obligations, Saxo will act on behalf of the client and without the need to notify the client in advance to resolve the delivery failure. Saxo will resolve a short stock position by acquiring the required stocks at market price. Saxo will resolve a short cash position by liquidating any or all positions under delivery and, if available, any long option position that provided cover for a settling short option position. In the exchange traded options context, this will be referred to as default handling. Transactions executed for the purpose of default handling will be charged additional (substantial) commissions. Default handling will be performed by Saxo’s Electronic Trading Desk. 

Therefore, Saxo recommends closing positions before expiry to avoid delivery failures. Notwithstanding the above, if Saxo could be exposed to uncollateralised losses incurred by clients, Saxo reserves the right to act pre-emptively and close out some or all of the client's positions that could cause potential losses the client cannot carry on their account balances. Pre-emptive close-out will be conducted under the responsibility of Saxo’s Trading Risk team.